Close To A Near-Term Bottom

Technicians have been telling us the market is oversold for a couple of weeks now. It looked especially ripe for a relief bounce last week, but instead became more and more oversold as more and more people sat waiting for the bounce.

I like to look at MACD and RSI to get an idea for technical conditions, and neither said two weeks ago that we were ready for a bounce. They’re pretty convincing now, though.

Let’s look at the year so far for patterns. I’ll go through the January low, March low, spring high, and last Thursday’s close for the S&P; 500 index of large companies, the S&P; 400 index of medium companies, and the Russell 2000 index of small companies.

Remember that for RSI, 70 and above is considered overbought while 30 and below is considered oversold.

On the S&P; 500 index of large companies:

January low on 1/22

  • Closed at 1,311
  • MACD was -36
  • RSI was 26

March low on 3/10

  • Closed at 1,273
  • MACD was -19
  • RSI was 31

Spring high on 5/19

  • Closed at 1,427
  • MACD was 15
  • RSI was 63

Last Thursday 7/3

  • Closed at 1,263
  • MACD was -29
  • RSI was 27

The index is sitting at its lowest point yet in the series and just under the 1,265 level that unemployment rate analysis three weeks ago suggested as a bottom. However, that assumed an unemployment rate of 6.7%. We’re at only 5.5% and many analysts expect it to reach 6.0%.

Overall, the index level says nothing, the MACD says buy, and the RSI says buy.

On the S&P; 400 index of medium companies:

January low on 1/22

  • Closed at 753
  • MACD was -26
  • RSI was 24

March low on 3/10

  • Closed at 745
  • MACD was -10
  • RSI was 31

Spring high on 6/5

  • Closed at 897
  • MACD was 11
  • RSI was 69

Last Thursday 7/3

  • Closed at 787
  • MACD was -16
  • RSI was 24

The index is in a strong downtrend aimed right at the 750 level that supported it in the past. That implies another 5% drop until it bottoms.

Overall, the index level says wait, the MACD says buy, and the RSI says buy.

On the Russell 2000 index of small companies:

January low on 1/22

  • Closed at 672
  • MACD was -23
  • RSI was 29

March low on 3/10

  • Closed at 644
  • MACD was -13
  • RSI was 29

Spring high on 6/5

  • Closed at 763
  • MACD was 8
  • RSI was 67

Last Thursday 7/3

  • Closed at 666
  • MACD was -14
  • RSI was 28

The index is in a strong downtrend aimed right at the 650 level that supported it in the past. That implies another 3% drop until it bottoms.

Overall, the index level says wait, the MACD says buy, and the RSI says buy.

Two-thirds of the evidence in this small piece of the market puzzle says buying is the move to make now. The other one-third shows that even if buying now is early, it’s probably not terribly early.

The old mantra is that oversold can become more oversold. It can’t stay that way forever, though. Eventually, the market gets as oversold as it’s going to get in the near term and then moves higher. To be sure that point has been reached, a lot of technicians wait for washout days to be followed by strong buying as a signal that the sellers are done.

Doing so back in March, however, would have had you buying in after the bounce was well underway. That’s common and what brings us to how this kind of overview must always end.

Nobody ever knows the exact bottom. You’re always going to be a little early or a little late, depending on how you approach the analysis. In other words, the best you should hope for is to get close.

The numbers now say that we’re close for the near term.

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